New York State Estate Tax Changes

Over the last year, after talking to many clients about estate tax planning, even though the New York State estate tax law was changed on March 31, 2014, many people paid no attention to the changes.

There was some good news regarding the change of law. The NY estate tax exclusion amount rises each fiscal year beginning April 1 until it equals the federal exclusion amount on January 1, 2019. Presently, for those dying now until April 1, 2016, the exclusion is $3,125,000. The top NY estate tax rate remains at 16%. Other positive news was that the law repealed the NY generation-skipping transfer tax, eliminating permanent relief for planning and administrative concerns in this area. The new law also provides permanent relief for surviving non-citizen spouses, allowing a material deduction without the requirement of a qualified domestic trust when a federal estate tax return is not required to be filed. The law change also identified that assets in certain types of trusts have to be included as taxable in the NY estate.

All this sounds pretty good but wait, let’s turn to the next page. The benefit of the NY exclusion amount is “phased out” for taxable estates between 100% and 105% of the NY exclusion amount. As a result of the law’s estate tax “cliff”, taxable estates that exceed 105% of the NY exclusion amount will lose the benefit of the exclusion completely – the entire taxable estate is subject to NY estate tax. What does this mean today? The new exclusion regime, at its highest statutory rate in 2017 will result in the avoidance of $430,800 of NY tax, which will be lost as the taxable estate exceeds the exclusion amount until it is lost in full when it exceeds 5% of the exclusion amount. In 2017 the estate of someone who dies with an estate equal to the exempt amount would pay no tax. Someone who’s taxable estate in 5% of the exempt amount ($5,512,000) would owe NY estate tax to $430,500. In other words, there is a $430,500 tax on the extra $262,500 (5% of $5,512,000). The law also added a limited 3-year look back period for gifts made between April 1, 2014, and January 1, 2019. Specifically, if a NY resident dies within three years of making a taxable gift, the value of the gift will be included in the descendant’s estate for purposes of computing the NY estate tax. The following gifts are excluded:

Gifts made when the decedent was not a NY resident.

Gifts made by a NY resident before April 1, 2014, and gifts made by a NY resident on or after January 1, 2019.

Gifts that are otherwise includable in the descendant’s estate under another provision of the federal estate tax law.

It is important for NY residents to consider, that if gifting is part of their estate plan, whether changes in that strategy is warranted.

Any property you leave to your spouse is exempt from both state and federal estate tax, no matter how large the amount. NY estate tax law fails to adopt one of the most significant provisions of the federal estate tax law, portability. Portability allows a surviving spouse the use of the unused federal gift and estate tax exemption of his or her’s deceased spouse. This provision allows married couples to take advantage of both spouses’ exemptions without significant tax planning. Since New York does not recognize portability, spouses will still need to use estate planning techniques (such a credit shelter trusts and separate spousal assets) to ensure that both of their New York exemptions are used.

Given the many changes in both federal and New York State estate and gift tax laws over the past four years, we strongly suggest that you contact Mayer CPAs to review your estate plan and find out how these changes affect you. It is important to make sure that you are taking full advantage of the increased federal and New York State exemptions and avoiding pitfalls by the current discrepancy between federal and NY exemption amounts. We welcome the opportunity to answer your questions, please contact a Partner today.